While no one wants to overpay for home insurance, it is far worse to be under-insured. Without adequate limits and the right types of coverage, you could face a financial shortfall should you ever need to file a claim. But how much home insurance is enough? In this article, we will explore the various types of coverage included in the two most frequently purchased home insurance policies and help you determine how much coverage you really need.
Understanding HO-3 and HO-5 Home Insurance
Home insurance is offered in many different forms. There are basic policies that provide too little coverage to protect against a major loss adequately, and there are policies with broader coverage that safeguard you against the unexpected. Often referred to as ‘standard coverage,’ the HO-3 insurance policy is the most frequently purchased form of coverage, followed closely by the more comprehensive HO-5.
Both types of home insurance provide open peril coverage to protect your home’s structure against all risks not excluded in your policy. However, only HO-5 offers open peril protection for your personal belongings, too. With HO-3, personal belongings are only protected against the named hazards listed inside your insurance policy.
Coverage Types
There are several coverages listed on HO-3 and HO-5 home insurance policies. Each serves an important purpose in protecting you against financial loss.
Dwelling (Coverage A)
The first coverage you may notice on your policy is for your home’s structure (Dwelling). This section will include your deductible, which is the amount you agree to pay toward the cost of a claim. We recommend choosing a deductible you can reasonably afford in the event of an unexpected loss. Though high deductibles of $1,000 to $2,000 can lower your annual insurance premiums, low deductibles of $500 can significantly reduce your cost burden when filing a claim.
You will also need to decide on a coverage amount for your Dwelling. Most lenders require enough coverage to at least pay off your mortgage, but we recommend purchasing enough protection to completely rebuild your home with same-quality materials and finishes if it is damaged or destroyed due to a covered event. Thanks to the ‘Co-Insurance Rule, too little coverage puts you at risk of a financial shortfall for total losses, as well as partial losses since insurers can under-fund your claims in proportion to the percentage your home is under-insured.
For help calculating your Dwelling coverage needs, contact an agent here at Patriot Insurance. We’ll use our home cost estimator to assess the local cost of reconstructing your home, as well as added costs, such as debris removal.
Other Structures (Coverage B)
Most properties have additional structures other than the primary dwelling; this includes all separate structures that are not used for business purposes. Examples include:
- Pole Barns
- Detached garages
- Driveways
- Fences
- Swimming pools
- And more
Insurers typically include coverage for Other Structures by default, and usually at no additional cost. Default limits are usually about 10 percent of your Dwelling coverage, although you can purchase additional coverage if necessary. Like Coverage A, the other structures on your property are not protected against exclusions, such as flooding. Talk with an agent here at Patriot Insurance if you think you may need supplemental coverage or higher limits than are available by default.
Personal Belongings (Coverage C)
The things you own are protected under Coverage C of your home insurance policy. This covers all of your belongings for their actual cash value (ACV); that is the depreciated value of your damaged or stolen items. Typical coverage for Personal Belongings is between 50 and 80 percent of your Coverage A limit, although you may need additional coverage for high-value items that are subject to dollar limits.
To help you better understand the actual value of your belongings, we recommend maintaining an inventory of your possessions and updating it frequently. Mobile apps are perhaps the easiest way to keep track of this information and also store it for safe-keeping.
Loss of Use (Coverage D)
If disaster strikes your home, you may have to live somewhere else while it is being repaired. Loss of Use coverage helps pay for the additional living expenses you incur as a result of not living in your own house. This could be the cost of rent, hotel fees, laundry service, meals, and more. While Loss of Use coverage has its limits, they are often set to 20 percent of your Coverage A limits by default.
Personal Liability (Coverage E)
Coverage E – personal liability – is arguably one of the most important parts of a standard home insurance policy. It provides coverage for third-party injuries and property damages caused by you, your pet, or a member of your household both on your property and away from home. Though there are some exclusions for things like auto and boat accidents, personal liability largely provides broad coverage for homeowners.
Types of Losses
Here at Patriot Insurance, we know that losses can occur in the most unexpected ways. Dog-bite related injuries, for example, are among the most frequently filed claims, and Minnesota ranks sixth in the nation with an average cost of those claims exceeding $38,000. Of course, personal liability can climb much higher than that – particularly for extensive property damages and severe injuries involving medical bills, rehabilitation, and lost wages. That is why we recommend purchasing high-limit personal liability coverage of at least $100,000 to $300,000.
Though high-limit personal liability insurance does not directly protect your home or belongings like other sections of your home insurance policy, it does provide indirect protection against loss by safeguarding homeowners against the financial responsibility of a lawsuit. Without adequate coverage, any damages that exceed the limits on your policy could fall squarely on your shoulders. That could mean draining your savings accounts, selling off your assets, or making payments from future wages for years to come.
For help determining how much personal liability coverage is right for you, contact our office today.
Medical Payments (Coverage F)
When guests are injured at your home, they should get the medical attention they need right away. Under Coverage F of a standard home insurance policy, third-party injuries occurring on your property are covered regardless of fault – usually for an amount between $1,000 and $5,000. This may be enough to pay for a health insurance deductible or cover the cost of an emergency room visit.
Endorsements
As a policy-holder, you have the option of enhancing your standard coverage with endorsements that provide additional coverage or benefits. These narrow coverage enhancements are designed to meet the needs of specific groups of homeowners, unlike the broad coverage automatically included in a standard policy.
Most homeowners can benefit from home insurance endorsements, but it is important to talk with an agent here at Patriot Insurance to determine which ones are right for you. Some are suggested for nearly all homeowners, such as water backup and sewer coverage. Others, such as a home business endorsement, may only be appropriate for certain policy-holders.
Beyond Home Insurance
Adequate home insurance limits can go a long way in protecting your house, belongings, and family, but there are some scenarios when coverage can still come up short. Many homeowners choose to supplement their home insurance policies with additional coverage – particularly increased personal liability protection available through an umbrella insurance policy.
This separate coverage provides secondary liability protection that kicks in when you reach the limits on your primary coverage. For example, if you have a $300,000 liability coverage limit and are sued for $750,000, your home insurance would not even cover half of your financial responsibility. In this case, an umbrella policy could pay the remaining $400,000 debt – all without affecting your income or assets.
Most homeowners can qualify for a $1 million umbrella policy for just $200 per year or less. To find out more about this important coverage or to get your free quote, contact our office today.
